H-P Hurd to replace Dunn as chairman

Calif. Attorney General Lockyer claims enough evidence to indict

SAN FRANCISCO (MarketWatch) -- Embattled Hewlett-Packard Co. Chairwoman Patricia Dunn agreed to step down Tuesday and be replaced by Chief Executive Mark Hurd, as California Attorney General Bill Lockyer turned up the heat in the boardroom scandal, saying on television he had enough evidence for indictments inside and outside the company.

Meanwhile, George Keyworth II, the H-P director whose phone records were obtained by allegedly illegal methods in a probe authorized by Dunn, announced his resignation in a statement in which he acknowledged leaking information to the media.

H-P
HPQ, -1.74%
issued the announcements after a week in which Dunn came under fire for the investigation into leaks of confidential boardroom information. Private investigators who conducted the probe obtained the phone records of H-P board members and journalists by misrepresenting themselves, and state and federal prosecutors are now investigating the matter.

Lockyer said in an interview on The NewsHour with Jim Lehrer that crimes were committed in the investigation and that his office has enough evidence "to indict people both within Hewlett-Packard as well as outside." A spokesman for Lockyer's office was not immediately available to comment on the statement.

A spokesman for H-P declined comment on Lockyer's statement, but said the company is "fully cooperating" with the California Attorney General's investigation.

The company's decision to recombine the chief executive and chairman's roles - which were separated after former H-P CEO Carly Fiorina was ousted in early 2005 - flies in the face of a push for more board independence in the wake of the corporate accounting scandals earlier this decade. See winners and losers in H-P board shuffle.

Still, even some corporate-governance advocates acknowledged that naming Hurd as chair may be what H-P needed to begin putting the matter to rest.

"This is a sub-optimal result, but for better or worse it may work," said Patrick McGurn, special counsel to Institutional Shareholder Services, which advises large investors on corporate governance issues. "This was the prototypical dysfunctional board," McGurn said.

Investors applauded the move, pushing H-P shares up 56 cents to close at $36.92. The move came ahead of Lockyer's comments.

The Department of Justice and the Securities and Exchange Commission are also probing H-P's actions.

Dunn, who last week said she would step down if asked by the H-P board, said in a statement that she was sorry for the methods taken in the leak investigation.

"The investigation, which was conducted with third parties, included certain inappropriate techniques," Dunn said. "These went beyond what we understood them to be, and I apologize that they were employed."

H-P said Dunn, 53, will remain a director after the January board meeting. H-P also said Richard Hackborn, an H-P director since 1992, will become the company's lead independent director. Hackborn was H-P's chairman for a short time in 2000.

In the same company statement, Hurd, 49, said that he was taking actions to make sure that such controversial investigative methods aren't used by H-P again.

"They have no place in H-P," Hurd said, adding that he wanted to put the matter to rest "so that we may fully resume our focus on the business."

The move to give Hurd both chairman and CEO responsibilities harkens back to the days of former Fiorina, who was fired in February 2005. At that time, Dunn was named non-employee chairwoman in a company attempt to separate the chairman and CEO positions and give the appearance of a more-independent board to act as a counterweight to the CEO.

Daniel Renouard, an analyst with Robert W. Baird, in Atlanta, left his outperform rating and $40 price target on H-P unchanged, saying, "We find H-P's timely actions appropriate and encouraging and we expect no financial implications."

Ed Harmon, strategic transactions director Pittsburgh law firm Thorp, Reed & Armstrong, and an advisor to several corporate boards, said the move to make Hurd H-P's chairman is surprising, in light of recent trends toward separating the CEO and chairman positions at many public companies.

"It has nothing to do with Hurd as a leader. He's done very well so far," Harmon said. "But from a corporate governance standpoint, it is a little surprising. The CEO is always a company insider, and the chairman is typically separate from the company."

According to H-P's most-recent proxy statement, filed in March, Dunn, as chairwoman, received a retainer of $200,000 in restricted stock or stock options, $36,000 in meeting fees, and $399 in H-P equipment for the company's 2005 fiscal year. The company's human resources and compensation committee also awarded her an additional $100,000 retainer that was effective March 16.

Keyworth admits leak but defends actions

Keyworth, who was asked to resign from the board in May after the board probe identified him as the source of media leaks, had refused to step down.

But in a statement announcing his resignation from the board, Keyworth said "it is best for the company that every aspect of this unfortunate matter be put in the past."

While he acknowledged being the source for an article published in January 2006 by the online media company Cnet Networks Inc., Keyworth defended his actions.

"The comments I made to the Cnet reporter were, I believed, in the best interest of the company and also did not involve the disclosure of confidential or damaging information," Keyworth said in the statement, which was issued by H-P.

In that same statement, Hurd acknowledged that H-P had often asked Keyworth to speak with the press "to explain H-P's interests" and that the company's board "recognizes that his discussion with the Cnet reporter was undertaken in an attempt to further HP's interests."

Still, "the board does not believe that Dr. Keyworth's contact with Cnet in January 2006 was vetted through appropriate channels."

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